Built on the backs of first home buyers

Last week, several newspapers ran a story in which the Labor Opposition criticised the New South Wales Liberal government because the number of first home buyers had plunged after the first home owner’s grant was ended for existing homes.

A photo of acting Opposition leader Linda Burney looking out sternly and sincerely accompanied the article, as she intoned in The Sydney Morning Herald's text that the Liberals had abandoned first home buyers:

"The acting Opposition Leader, Linda Burney, said this decision and the axing of stamp duty exemptions for first home buyers of existing homes from December 31, 2011, meant the New South Wales government had 'abandoned first home buyers'.

"'These figures clearly show [Premier] Barry O'Farrell has locked first home buyers out of the property market with his cuts to stamp duty exemptions and first home buyer bonuses,'' she said. ''The worst loan approvals for first home buyers in 20 years should be a wake-up call for the O'Farrell government. Their approach clearly isn't working'."

What bollocks. First home buyers weren’t locked out by the ending of the first home vendors’ grant: they were locked out by the impossibly high prices that this grant has helped generate over the 30 years since it was first invented. And its purpose has never been to give first home buyers a helping hand: it has always been used as a way of giving the economy the economic equivalent of a steroid injection. First home buyers have instead been the sacrificial lambs of an asset-price-inflation route to apparent national prosperity.

This was why Bob Hawke’ introduced the first home owner’s grant in the first place back in 1983. Bob Hawke had just beaten Malcolm Fraser in an election over the level of unemployment, and his advisors suggested a grant as a way of reviving the housing market, and perhaps the economy. It worked a treat, and that (plus speculative lending to finance the Ponzi schemes of Christopher Skase and the rest of the White Shoe brigade) enabled Paul Keating to claim the mantle of 'World’s Greatest Treasurer' in the 1980s.

But the grant also supercharged house price rises as well, so each boost to a flailing economy flailed the chances of first home buyers being able to buy a house in the first place. The impact of the grant on house prices is obvious when you look at movements in house prices before it was introduced, after, when it was in operation, and when it was doubled (or trebled, as under Kevin Rudd).

Before the scheme was introduced, the difference between the quarterly change in consumer prices and change in house prices was a measly 0.07 per cent – basically a rounding error away from no difference at all, given that there was a range from as much as a 5.5 per cent fall to a 3.9 per cent increase per quarter over those three decades (I start from 1951 because that’s several years after rent-control legislation was abolished, which led to a rapid spike in prices for a few years – and Yes Virginia, there was a time once when governments tried to keep rents low, rather than trying to keep house price rises high).

After its introduction, the average quarterly change in real house prices has been 0.81 per cent – something you can "bank on”, so to speak. This is when the myth that house prices always rise took hold in the Australian psyche – without the awareness that this was not a natural phenomenon like sunrise, but took not only rising leverage from the banks, but also active intervention in the property market by both state and federal governments.

When you drill down further into the data, the evidence that the first home vendors’ grant played a significant role in causing the Australian house price bubble starts to look like a smoking gun in America (and denials of any role for it in the bubble by the local spruikers starts to sound like the NRA choir in America as well).

There were periods since the first home vendors’ grant was first introduced where the grant was completely removed across the nation: between the mid-1980 and 1988, then after 1999 and before 2001. In those between-FHVG periods, the rate of quarterly price increase dropped to 0.26 per cent – chicken feed, but maybe enough for some people to consider speculating in property over putting their money in a bank account.

But when there was a first home vendors’ grant in operation, the quarterly rate of increase in real house prices was 2.18 per cent – a huge return. And when the government was so 'generous' to first home buyers as to double or treble the grant – under both Howard (Liberal) and Rudd (Labor) – the quarterly rate of increase rocketed to 3.1 per cent.

Table 1: The First Home Vendors Grant and quarterly change in inflation-adjusted Australian house prices since 1951

Real House Prices and the FHVG
Change per quarterBeforeAfterAll DataDuring BetweenDoubled/Trebled
Mean
0.07 per cent
0.81 per cent
0.42 per cent
2.18 per cent
0.26 per cent
3.10 per cent
Min
-5.53 per cent
-3.83 per cent
-5.53 per cent
-2.21 per cent
-2.23 per cent
-0.91 per cent
Max
3.91 per cent
7.86 per cent
7.86 per cent
7.86 per cent
3.03 per cent
4.93 per cent
Std. Dev.
1.73 per cent
2.20 per cent
1.99 per cent
2.72 per cent
1.27 per cent
1.84 per cent
Count
131
115
247
25
50
7

So the real beneficiaries of the first home vendors’ grant weren’t the poor first home buyers, but those selling their first homes to them – which is why I call it the 'vendors grant' – and the banks, who took the extra deposit the first home vendors’ grant gave first home buyers, and ladened them up with initially three and ultimately over ten times as much more debt.

Its role as the "Lance Armstrong” of macroeconomic policy is also obvious when you see how the first home vendors’ grant was often motivated by a recession or the fear of one.

Figure 1: The FHVG, Australian real house prices, and unemployment

image

The only time that rising unemployment didn’t result in the government introducing a first home vendors’ grant was after the 1990s recession, when Bob Hawke’s reintroduction of the grant caused the biggest house inflation bubble in Australia’s history, and its moderate bursting caused "The Recession We Had to Have”. The reason why it didn’t then is neatly summarised in a famous Keating aphorism: "a souffl doesn’t rise twice”. Having caused the biggest spike in real house prices ever, it wasn’t possible to do the same thing again immediately.

And it shouldn’t be done again now either, after Rudd’s doubling and tripling of the grant in 2008-2010 caused the last price spike.

The grant should be abolished, and governments should keep their hands out of asset markets. The O’Farrell government is still in there with its grant to purchasers of new properties, but that isn’t as damaging as the broader grant to buyers of existing properties as well. In that sense, I applaud the O’Farrell government for limiting the damage done to first home buyers – and indeed the economy – by the grant.

Linda Burney, let's leave it that way.

Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney and author of Debunking Economics and the blog Debtwatch.